Congress Seen Tightening Oversight of Foreign Banks

Congress is likely to strengthen supervision of foreign banks this year even if it does not agree on a broad banking-reform bill, according to a Federal Reserve Board official.

Ricki R. Tigert, associate general counsel for foreign banks at the Fed, said a bill would probably be passed as part of a narrow banking bill. Ms. Tigert made her comments at a law and business seminar in New York.

The bill, known as the Foreign Bank Supervision and Enhancement Act, would give the Fed control over the operations of foreign banks in the United States. It is one of three pieces of legislation related to foreign banks now before Congress.

Fed Would Have Last Word

The legislation would permit state banking authorities to continue licensing foreign banks, but they would be subject to final approval by the Fed.

Other provisions give U.S. regulators the right to bar entry to foreign banks that are not subject to consolidated supervision of their worldwide operations. It would require foreign banks to obtain approval for opening representative offices.

Foreign banks have been a growing force in the United States and hold $757 billion in assets here, 22.5% of all U.S. banking assets.

Regulators Drew Criticism

The legislation comes in the wake of the Bank of Credit and Commerce International scandal, in which Federal regulators have been criticized for not acting earlier to stop the bank's illegal activities.

A separate bill, known as Fair Trade in Financial Services, would oblige U.S. regulators to deny access to banks from countries that do not offer U.S. banks equal treatment.

Consensus on Supervision

Still another piece of legislation, included in the broad banking reform bill sponsored by the Bush administration, would oblige foreign banks that wish to engage in securities-related activities to restructure their U.S. operations and meet U.S. capital requirements.

Ms. Tigert said that although there is still debate over the timing and provisions of the two regarding fair trade and securities activities, there is little disagreement over the need to stregthen supervision of foreign banks in the wake of two recent major foreign bank scandals involving Italy's Banca Nazionale del Lavoro and the Luxembourg-based BCCI.

Banca Nazionale engaged in billion of dollars in unauthorized and unreported trade finance with Iraq. BCCI, whose assets were seized after charges of money laundering, fraud, and bribery, also secretly acquired control of First American Bankshares Inc., Washington, D.C.

Global View

Ms. Tigert added that there is increasing emphasis among regulators worldwide on the need for consolidated supervision of banks as a result of the two scandals.

"BCCI operated in 73 countries and was never subjected to consolidated supervision," Ms. Tigert said.

"There was quite an extreme effort to conceal fraud in documents not subject to review by U.S. authorities."

In a separate development last week, the Securities and Exchange Commissions agreed to exempt non-U.S. banks from the definition of "investment company", permitting foreign banks to offer and sell debt or equity in the U.S. without seeking exemption from the 1940 Investment Company Act.

The act defines an investment company as any company holding securities. The act exempts U.S. banks but did not exempt foreign banks.

Davis, Polk & Wardwell, a New York law firm that counsels foreign banks, estimated that the ruling will put foreign banks on equal footing with U.S. banks and save an average six months' paperwork and $50,000 in costs for each issue.

Pierre de Saint Phalle, a securities lawyer at Davis Polk, said that the ruling should pave the way for foreign banks to soon bring a larger number of offerings to market in the U.S.

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